In the March Budget, it was announced that Deeds of Variation would be reviewed as part of a crackdown on tax avoidance. Following the Summer Budget, the Government has now launched a consultation on the use of Deeds of Variation for tax purposes with comments being accepted until 7 October 2015. We will then find out whether Deeds of Variation are to be abolished in their entirety or if changes are made to the way they can be used.
Deeds of Variation (or Deeds of Family Arrangement) are a binding method for a family to re-arrange, after death, who inherits. A beneficial interest inherited after a death, is redirected by the beneficiary to someone else. Effectively, a variation is a gift from the original beneficiary to the new one within two years of death. The benefit of proceeding in this way is that it is possible to elect that the normal Inheritance Tax (IHT) and Capital Gains Tax (CGT) rules which otherwise apply to such gifts do not apply so that the gift is treated as if it were made by the deceased.
Deeds of Variation were originally introduced nearly 50 years ago as a means of addressing perceived unfairness when there was a change from Estate Duty to Capital Transfer Tax. A tax efficient Will written under Estate Duty may not have been so under Capital Transfer Tax and therefore the ability to change those dispositions after death was provided by way of a Deed of Variation.
Since that time, Deeds of Variation have been a useful tool for IHT planning but also for providing flexible family protection and they are sometimes used to correct other problems in the distribution of an estate which, had the testator had the opportunity or capacity to do so, they would very probably have corrected themselves.
It may be that in certain circumstances the use of Deeds of Variation has gone well beyond the envisaged purpose to carry out tax planning. If they were abolished, however, it would have wider implications for families trying to re-arrange the distribution of a family member’s estate post death where tax is not the main concern. Or indeed if the aim is to achieve a sensible tax treatment that, owing to a lack of advice or poor advice, the family had failed to plan for during their lifetime.
HMRC are seeking evidence by way of a questionnaire to identify the main reasons for using a Deed of Variation and whether they generally increase or decrease tax payable. It is to be hoped that the responses to the consultation will demonstrate the beneficial role that Deeds of Variation play. If they are abolished clients are likely to need more complex Wills and advice, and will need to review their Wills more regularly. For those who cannot afford this, or are unaware of the consequences, their estates may pay more tax and the distribution of their estate may adversely impact on their families who will have no form of remedy.
For anyone where a Deed of Variation is potentially possible now, professional advice should be sought and acted upon as soon as possible as the ability to vary may not be available in the future.
For further information, please contact Alice Clewes, Partner at Hay & Kilner
Call: 0191 232 8345